All posts tagged QE

The Federal Reserve took no action at the conclusion of its two-day FOMC meeting, it made no major changes, and it made it clear once again that Ben Bernanke is in charge, and he’s keeping the “Fedal” to the metal.

That’s enough for the markets.

The reaction hasn’t been as volatile as in the past, a sign that that Fed’s message is getting through clearly. The Dow was up as much as 80 points during the press conference, and the S&P 500′s up 11 at 1559, putting its 2007 record high of 1565 in play again.

One of the market’s main preoccupations is the guessing game called “When Will the Fed Change Direction?” With the economy seemingly improving on several fronts, albeit not the one most important to the Fed, there’s been a lively debate in the market about when the Fed might break the glass on its exit strategy.

Just about everybody has capitulated to the Fed and its relentless drive to reflate the assets markets. The bears have been chased from their caves, the indexes are at or very nearly at record peaks, no problem seems too big for the central bank and its virtual printing press.

When everybody’s on one side of a bet, though, that’s when investors should be concerned, said Steve Blumenthal, founder and CEO of CMG Wealth Management. The reality is there will be a cost to the Fed’s policies, he said. You don’t just inject $2 trillion (and growing) into the economy without some consequences.

The only real question is when the bill comes due. “Ultimately,” he said, “there’s too much money in the system.” The Fed wants to create inflation, they will eventually be successful in that, and that is the next problem.

“There is some evidence that the low rates of return available on liquid and safe assets, such as cash and Treasuries, are forcing institutions to search for yield by buying riskier assets, such as corporate bonds,” Paul Dales, senior U.S. economist at Capital Economics, wrote this morning, noting the Fed’s Flow of Funds report last week showed non-financial companies issued a record $782 billion in the fourth-quarter.

“Over two-thirds of these bonds were bought by life insurance funds, mutual funds and exchange-traded funds,” Dales wrote. “This was possible in part only as these institutions reduced their holdings of safer assets, such as cash, commercial paper and government-sponsored mortgage-backed securities.” For example, corporate bonds now comprise 11.7% of all the assets held by ETFs, Dales pointed out, up from 7.5% at the end of 2010.

Barry Ritholtz, the well-known Big Picture blogger, stopped by the Markets Hub this morning to give his take on this record. Part of the rebound from the March 2009 lows is based on market fundamentals, he said. But a big chunk is courtesy of the Federal Reserve and Ben Bernanke.

“At least the first part of this rally is a rock solid foundation,” he said. “The second half, the argument goes, is built on inorganic matter, primarily Fed liquidity and generosity.” If the Fed wasn’t doing QE4, the Dow would probably be 20-30% below where it is now, he said.

While the Oracle of Omaha says he has “enormous respect” for Ben Bernanke, he’s also keenly watching how the Fed chairman plans to unwind his accommodative efforts in this fragile economy.

In an interview on CNBC, Warren Buffett said the pace of the Fed’s stimulus is not something that can go on forever. There could be a flight out of risky assets, such as stocks, if investors think the Fed is going to tighten, he warned.

“All over the world everybody that manages money is waiting to catch the signal that the Fed will reverse course,” Buffett said. “And I think they are on a hair trigger.”

Stocks have been pushed higher than they would’ve otherwise performed, Buffett said, due to the Fed keeping rates near zero and its massive bond-buying programs.

The prediction market is in high gear as 2013 gets underway. Thankfully, we don’t have any doomsday predictions from long-gone civilizations to worry about, at least none of which we’re aware. Most people in the here and now, in fact, seem quite to be taking a rather sublime angle on the coming year.

Byron Wien and Bill Gross aren’t quite so chipper.

The stock market can content itself with the knowledge that a gaggle of the world’s most important central banks are hard at work flooding the plains with liquidity, but in the real world there are still plenty of risks. One of those risks, as Gross makes clear, is the flood of central bank easing itself.

Byron Wien, vice chairman of Blackstone Advisory Partners, put out his list of ten surprises for 2013, potential disrupting events that could occur this year that the market isn’t expecting.

Philip Seymour Hoffman stars in a new film about a charismatic cult leader that has raised eyebrows for its supposed similarity to Scientology. But the better comparison, perhaps, may be the Cult of the Federal Reserve.

Wait, what? Let Walter Zimmermann explain. Zimmermann, senior technical analyst at United-ICAP, sees a disturbing trend among investors these days. Investors, he says, have had their spirits broken. They no longer think for themselves. They’re like directionless lemmings, confused and willing to believe in anything that can offer them hope.

And then there was Facebook. Once upon a time, the social networking company’s public listing was The Next Big Thing, Zimmermann says, the elixir that could break the stock market out of its seemingly endless spiral:

The followers of the Facebook IPO formed a religion. Maybe cult is a better word. That cult was very quickly revealed to be centered on a false god…

This Facebook IPO was expected to save the California economy and uplift the world. The thousands of Facebook disciples around the world shown staring up at stock market monitors had the rapt and entranced gaze of those expecting to be shown a miracle. The talking heads on business cable TV were breathless with excitement – as if a profound revelation was about to be granted.

Well, we all know how that turned out. But instead of looking deep within themselves, investors have simply retrained their hopes on the Fed and its ability, via the power of the proverbial printing press, to deliver them to higher returns, Zimmermann says:

The massive weight of collective hope that was formerly invested in Facebook… is now focused squarely on Ben Bernanke and the Federal Reserve. The mania has been transplanted, however it is still a mania.

The U.S. dollar is getting knocked silly this morning, while stocks are chasing the euro higher on expectations that central bankers will cut loose with more easy money.

U.S. stocks also rallied during the April FOMC meeting, and subsequent sessions, with the Dow rising about 350 points in six sessions through May 1. But in the following five sessions, the blue-chip average fell almost 350 points, on its way to an eventual 6.7% decline in May.

This time around, stocks have been rallying over the last few weeks ahead of the two-day Fed meeting, beginning today. The Dow is currently up for the eighth time in the last 11 sessions.

At last glance, the Dow jumped 111 points, or 0.9%, to 12852, led higher by Bank of America, Microsoft, Caterpillar and United Technologies. The tech-heavy Nasdaq is up 32 points, or 1.1%, at 2927. The S&P 500 rises 13 points, or 0.9%, to 1357.

Meanwhile, the ICE Dollar Index, which tracks the U.S. dollar against a basket of currencies, is down 0.7% at 81.38. It has dropped 2% this month as investors prepare for another round of stimulus from the Fed, which would hurt the value of the greenback.

So, the Dow’s now down about 100 points on the week; it’s been down, up, and down again, and the only certainty in the market right now is almost-complete uncertainty.

Today was another round of headline roulette; the Dow was erratic, to put it politely. It was down early, then up, rose through the Jamie Dimon testimony (if not because of, at least concurrent with), and then spent the afternoon sliding, egged on at least partially from a story about Greeks taking their money out of banks ahead of Sunday’s election.

The Dow lost 77 (0.6%) to 12496, the S&P 500 fell 9 (0.7%) to 1315, and the Nasdaq Comp dropped 24 (0.9%) to 2819. The European bond market continues its gyrations, with the yield on the Spanish and German 10-year bonds rising. That’s a nasty trend that’s been in place since last weekend’s Spanish bank bailout worked exactly the opposite of expectations: rather than bolstering confidence, it has only undermined it.

We’ve got two more days of this, and then we’ll have to sort out the ramifications of whatever the Greeks vote for this weekend. It really seems, too, that the only thing holding the U.S. stock market together, and it’s a slender thing, really, is the hope that somehow the Fed will ride to the rescue when it meets next week.

Gold is paring earlier gains, a sign that today’s early rise could be more the result of bargain-hunting after futures slid to 2-month lows last week–rather than funds placing new bets in expectations of more quantitative easing from the Fed.

“We remain bearish of precious metals in the short term,” says TD Securities, “and look to any increases for potential selling opportunities.”

Traders attribute gold’s overnight gains to increased QE odds after Friday’s weak US jobs report, as well as the return of Indian buyers after a jewelers’ strike there.

Some fights are as easy to pick as walking into a Boston bar wearing a Yankee cap.

Associated Press

On Wall Street, the flashpoints are different but the idea is the same – certain topics don’t leave many people sitting on the fence. So it’s particularly interesting to see Morgan Stanley’s take on one heated and still-relevant debate: How much of an impact does loose monetary policy have on asset values?

The bank’s view, at least as it pertains to commodities: Not so much. The fact that raw materials like industrial metals and agricultural commodities haven’t soared as high as global equities since October is evidence, Morgan Stanley analysts said in a research note late Thursday, that “unconventional monetary stimulus is less inflationary than (some) suppose.” [Gold is an exception, said Greg Peters, chief cross-asset strategist at Morgan Stanley and lead analyst on the note, because it benefited from moves that threatened to erode the value of paper currency].

The Bank of Japan’s quantitative easing surprise and inflation target Tuesday sent the yen reeling to a three-month low against the dollar and closed in on a two-month low versus the yen euro. The BoJ’s move, and the yen’s reaction, made many analysts predict a new era of prolonged yen weakness.

But apparently the yen never got the memo: in morning US trade, USD/JPY is off 0.22% to trade near 78.25 and EUR/JPY is sliding, recently down about 0.6% at 102.40.

Greek debt fears are driving safe-haven flows into the Japanese currency, defying analysts’ predictions and working against Japan’s desire for a weak currency.

Chris Fernandes at Bank of the West is one of the few market watchers who isn’t a believer in a weakening yen. “I’m a little bit skeptical of [USD at] Y80,” he says, a target now touted by Credit Suisse and other Wall Street banks. “The yen will strengthen as a safe-haven currency,” and probe new record highs by the second half of this year, Fernandes contends.

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Technology companies whose earnings disappoint investors are paying an unusually large toll this quarter, highlighting Wall Street’s high expectations for the sector at a time of uneven economic growth.